Interoperability as an Offramp
Main page Analytics, Cryptocurrency
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May 29, 2020
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What does the future of cryptocurrency look like - a single protocol reigning so dominant that other tokens can’t get a foothold or a complex ecosystem of many blockchains and platforms? More and more, crypto’s movers, shakers, and big thinkers are ​inclined​ to predict the latter answer. Rather than forcing one protocol to awkwardly meet all users’ needs at once, crypto diversity lets users pick the right blockchain for the job. This diversity, interoperability advocates argue, will drive wider crypto adoption by providing room for protocols and platforms tailored for specific situations and users.

Heady conversations about blockchain’s grand future will continue, but interoperability is a very real on-the-ground concern for many crypto users. A developer with significant holdings of one token may need to transfer them to another to pay fees for using a virtual machine. A social media manager working for a blockchain startup might receive part of his/her salary in crypto - but most landlords, grocery stores and utility companies still don’t accept payment in Bitcoin. Interoperability gives users an onramp to explore the crypto world when they’re just starting to think beyond fiat, an offramp when capital transferred to crypto needs to meet vital cost-of-living needs, and countless bridges between protocols that helps users find specialized platforms for their day-to-day blockchain needs.

Swapping Without Interoperability

A user holds one crypto but needs another - what should they do? Historically, most of their options have consisted of crypto exchanges or swapping services. There are plenty of exchanges and services out there, and they can vary significantly in how they handle transactions, how much privacy they provide users, their fees, and other important metrics. Yet they all tend to share similar drawbacks. Many exchanges and services are custodial, meaning that users have to transfer their currency to a third party—the exchange or service— in order to complete a transaction.

That custodial transfer raises a lot of red flags for many different kinds of crypto users. Many people started using crypto in the first place because of its inherent decentralization. That decentralization allows secure and trustworthy interactions directly between users, without needing a third-party administrator. Using a centralized custodial service, on the other hand, forces users to trust a third party.

Custodial exchanges can demand identifying details from privacy-oriented users to meet KYC/AML requirements. They can require transactions to meet confirmation thresholds before releasing funds, creating delays that can last over ten hours. Perhaps most alarmingly, custodial swapping options can store the crypto they’ve received custody of as they see fit, and their storage solutions often aren’t very safe. Hackers ​stole​ almost $300 billion from crypto exchanges in 2019 alone.

Some services, such as decentralized exchanges, are built to provide direct P2P transactions that don’t require handing custody over to a third party. However, even these solutions often require trusting an outside administrator such as an oracle controlled largely by a single party. These non-custodial solutions also tend to struggle with access to liquidity and popular trading pairs.

Regardless of whether you’re turning to a custodial or non-custodial service for your crypto swaps, most available services create high financial barriers to interoperability. They charge significant fees for moving value between different protocols, creating a hefty admission charge to take advantage of a diverse crypto ecosystem. And because crypto prices tend to be volatile, users risk losing significant value for even temporary swaps initiated through these services. A user who holds Bitcoin but wants to use a different cryptocurrency has to actually sell off their Bitcoin to use that second crypto even briefly. When they’re ready to transfer value back to Bitcoin, price fluctuations may mean their money buys a much smaller amount of Bitcoin than the amount they had to give up.

A Seamless Solution

Interoperability is an essential blockchain need that many swap services simply haven’t been able to satisfactorily fill—until the introduction of interoperability protocols. These protocols support direct communication between different blockchains. Users often only initiate a single step, such as sending crypto from one wallet to another. Reducing the transaction to a single step drastically reduces the time and transaction fees required for each transaction, as well as potential security risks introduced during each step of a more complicated process.

The Swingby​ protocol launched their first interoperability protocol using a Bitcoin stablecoin—a crypto whose value in Bitcoin remains stable regardless of price fluctuations. They started with Bitcoin because it’s by far the most liquid and widely held crypto, which makes it a useful “launchpad” for spreading interoperability bridges between protocols.

The first Swingy “Skybridge” connects Bitcoin and Binance chain, allowing users to create stablecoins (BTC.B) acting as depository receipts for Bitcoins on the Binance blockchain. Nodes on the Swingby network collaborate to create a TSS group, which acts as a decentralized temporary custodian protecting the Bitcoin behind the “depository certificate” created on the Binance blockchain. Anyone can join the Swingby Network and operate Swingy node software, but node operators need to stake their Swingby tokens to participate in the decentralized consensus process operating this decentralized temporary custodian.

The Swingby protocol offers speed and cost-effectiveness comparable to transactions that don’t jump between blockchain protocols, such as trades between ERC-20 tokens. A swap from Bitcoin to Bitcoin-pegged Binance chain tokens, for example, costs only 0.1% of the transaction in addition to a 0.000005 BTC.B fixed fee. And though Swingby’s testnet is starting with a Bitcoin-Binance chain bridge, their model reflects true interoperability because it can be extended to a virtually endless number of trading pairs.

Swingby users will eventually be able to not just use their Bitcoin on Binance chain, but to use Ethereum on EOS, XRP on Tron, and countless other bridges. That means virtually unlimited access to dApps, DEXes, and other protocol-specific platforms without losing underlying investments in other assets.

Interoperability will be key to the future of blockchain, but current crypto users need it now, whether they’re trying to onramp into one crypto, offramp from another, or simply make the most of a thriving and diverse crypto ecosystem. Protocols such as Swingby offer a vision of a crypto future where interoperability is a given rather than an expensive and insecure luxury offered by exchanges.

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